Wednesday, November 10, 2010

"The Payments ... Would Not Constitute Facilitation Payments for Routine Governmental Actions Within the Meaning of the FCPA"

The above words are from the DOJ's non-prosecution agreement with Noble Corporation ("Noble"). The DOJ used this phrase twice in the NPA and one can reasonably conclude that if the DOJ felt the need to express such a statement twice, that the FCPA's facilitating payment exception is probably on the minds of many in connection with the CustomsGate enforcement actions.

Next up in the analysis of CustomsGate enforcement actions is Noble Corporation (see here). See this prior post for analysis of the GlobalSantaFe enforcement action.

The Noble enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $8.2 million ($2.6 million criminal fine via a non-prosecution agreement; $5.6 million in disgorgement and interest via a SEC complaint).

During the time period relevant to the enforcement action, Noble was a Cayman Islands company. In March 2009, a new Swiss parent company, also called Noble Corporation, was created and Noble Corporation, the Cayman Islands company, became a wholly-owned subsidiary of the Swiss parent company.

DOJ

As set forth in the NPA (see here), the DOJ agreed "not to criminally prosecute Noble [...] or any of subsidiaries [...] related to the making of improper payments by employees and agents of Noble and/or its subsidiaries to officials of the Nigerian Customs Service in connection with Noble's and/or its subsidiaries' import and export of goods and items relating to its operations in Nigeria from January 2003 to July 2007, and the accounting and record-keeping associated with these improper payments."

According to the Statement of Facts in the NPA, a "Nigerian Customs Agent" provided a variety of logistics and customs services for Noble Drilling (Nigeria) Ltd. ("Noble Nigeria") a wholly-owned subsidiary of Noble and the primary Noble operating company in Nigeria. The Nigerian Customs Agent submitted false documents to Nigerian customs officials on behalf of Noble Nigeria "relating to the temporary importation of rigs owned or operated by Noble Nigeria into Nigerian waters" and the Nigerian Customs Agent invoiced Noble Nigeria and was paid for its services.

The Statement of Facts describes "The Nigerian Temporary Import Process." As described, if Noble were to "permanently import a rig into Nigerian waters" the customs duties were significant, between 10-20% of the total value of the rig. Alternatively, Noble could import rigs and other items on a temporary basis in which case no customs duties would be assessed. However, as described in the Statement of Facts, "a rig, or other item, could be imported on a temporary basis only if the item: (a) was considered a high valued piece of special equipment, (b) was not available for sale in Nigeria, and (c) was being imported temporarily and was intended to be exported." If these requirements were met, "a company, through a local customs agent, could apply for a temporary import permit." ("TIP").

According to the Statement of Facts, "items imported under a TIP (and TIP extension) could not remain in Nigeria longer than the period allowed for by the TIP and/or TIP extensions. When the TIP (or TIP extension) expired, the owner "could either choose to permanently import the rig ... or export the rig and re-import it and obtain a new initial TIP." According to the Statement of Facts, "the failure to export the rig after the TIP expired could result in the assessment of Nigerian penalties of up to six times its cost."

The Statement of Facts indicate that Noble Nigeria chose to temporarily import rigs into Nigeria and that Noble Nigeria employed the Nigeria Customs Agent to apply for and secure its TIPs and TIP extension.

According to the Statement of Facts, "whenever a TIP (and related TIP extensions) expired for a rig in Nigeria, the Nigerian Customs Agent, with the knowledge of Noble Nigeria, engaged in a process of submitting false paperwork on Noble Nigeria's behalf to avoid the time, cost, and risk associated with exporting the rig and reimporting it into Nigerian waters" - the so called "paper process" or a "paper move." The Statement of Facts further assert that the "Nigeria Customs Agent, with the knowledge of Noble Nigeria, created and caused to be presented to the [Nigeria Customs Service] NCS documents that reflected that the rig had been physically exported and reimported, when, in fact, the rig had remained in Nigeria."

According to the Statement of Facts, the Nigeria Customs Agent included a line item in its invoices for "special handling charges" and "Noble Nigeria personnel were informed by the Nigerian Customs Agent that all or part of the 'special handling charges' would be paid by the Nigeria Customs Agents to NCS officials." Further, the Statement of Facts assert that "Noble Nigeria personnel approved the payments to the Nigerian Customs Agent with the knowledge that some or all of the payments would be paid to NCS officials."

The Statement of Facts assert that "certain Noble and Noble Nigeria managers and employees authorized paper moves on five occasions." In a separate section of the NPA titled, "Corporate Knowledge of the TIP Paper Process" the following statements are made.

"Manager A" (a U.S. citizen and a former manager in Noble's Internal Audit Department) "interviewed several Noble-Nigeria employees who explained that false paperwork had been created and submitted to NCS officials through the Nigeria Customs Agent in connection with the process of securing TIPs" and that Manager A "also learned that the Nigeria Customs Agent in the past had charged a fee of approximately $75,000 per TIP to secure the TIPS."

Manager A provided a written summary to Executive A (a U.S. citizen, an officer of Noble, and Head of Internal Audit).

Executive A discussed Manager A's findings with Executive B (a U.S. citizen, an officer of Noble, and the Vice President-Eastern Hemisphere with management responsibility for Nigerian operations). Executive A then informed the Senior Executive (a U.S. citizen, an officer of Noble, and the former Chief Financial Officer).

The Audit Committee was advised of the "paper process" as was "members of Noble's senior management."

Executive B was tasked with "ensuring the Company's compliance with all applicable rules and regulations related to the importation and exportation of assets in Nigeria...".

Corrective action was contemplated, such as permanently importing rigs or moving them to a free trade zone, but Manager A and Executive B "decided that due to the time, cost, and risk of permanently importing or moving the rigs, the paper process would be used for three rigs for which TIPs had expired."

"The Audit Committee was not advised of the decision to resume the paper process."

Without any elaboration, the Statement of Facts states that the above described payments "would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA."

The Statement of Facts continue - between May 2005 and March 2006 "a total of five (5) TIPs were obtained through the submission of false documents via the paper process, and each included the payment of 'special handling fees' to the Nigeria Customs Agent. The 'special handling fees' ranged from approximately $13,800 to $17,000."

According to the Statement of Facts:

"By their approval of the payments and the process, the Senior Executive, and Executive B caused Noble to inaccurately record in its books, records, and accounts the five (5) "special handling fee" payments paid to the Nigeria Customs Agent in a "facilitation payments" account totaling approximately $74,000, when the Senior Executive, Executive A, and Executive B knew that some or all of these payments would be passed on to NCS officials to obtain TIPs. Thus, such payments could not be facilitation payments for the performance of a "routine governmental action" within the meaning of the FCPA."

The remainder of the Statement of Facts describes how Executive A failed to advise the Audit Committee and/or concealed from the Audit Committee that the paper process had resumed.

According to the Statement of Facts, "the total benefit received by Noble Nigeria for these payments in avoided costs, duties, and penalties was approximately $2,973,000."

As noted in the NPA, the DOJ agreed to enter into the NPA based, in part, on the following factors:

"The Department enters into this Non-Prosecution Agreement based, in part, on the following factors: (a) Noble's discovery of the violations through its own internal investigation; (b) Noble's timely, voluntary, and complete disclosure of the facts described in [the Statement of Facts]; (c) Noble's extensive, thorough, real-time cooperation with the Department and the SEC ...; (d) Noble's voluntary investigation of the Company's business operations throughout the world; (e) the existence of Noble's pre-existing compliance program and steps taken by Noble's Audit Committee to detect and prevent improper conduct from occurring; (f) Noble's remedial efforts to enhance its compliance program and oversight that have already been undertaken; (g) Noble's agreement to continue to implement enhanced compliance measures ...; and (h) Noble's agreement to provide annual, written reports to the Department on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures ...".

As is standard process in an NPA, Noble admitted, accepted, and acknowledged its responsibility for the conduct of its employees, agents, and subsidiaries as set forth in a Statement of Facts, and further agreed "not to make any public statement contradicting" the Statement of Facts.

SEC

The SEC's complaint (here) concerns the same core set of facts as set forth in the DOJ's NPA.

In summary fashion, the SEC alleges that "through the TIPs obtained using the paper process, Noble obtained profits from continued operations of rigs in Nigeria and avoided the costs of moving rigs out of and back into Nigerian waters." According to the SEC, "Noble's total gains from this conduct were at least $4,294,933."

The SEC charged Noble with violating the FCPA's anti-bribery provisions, as well as the FCPA's books and records and internal control provisions.

As to the FCPA's books and records charge, the SEC alleges that "Noble Nigeria recorded the portion of the payments it made to its customs agent that certain Noble personnel believed were being passed on to Nigerian government officials in Noble's 'facilitating payment' account and in some cases to other operating expense accounts..." However, without elaborating the SEC states, "because these payments were not qualifying facilitating payments under the FCPA or otherwise legitimate expenses, Noble created false books and records by recording the payments as such."

As to the internal controls charges, the SEC alleges that "although Noble had an FCPA policy in place, Noble lacked sufficient FCPA procedures, training, and internal controls to prevent the use of the paper process and making of payments to Nigerian government officials to obtain TIPs and TIP extensions."

Without admitting or denying the SEC's allegations, Noble agreed to agreed to an injunction and will pay disgorgement and prejudgment interest of $5,576,998.

Neither the DOJ nor the SEC resolution require the company to engage a compliance monitor.

Both the DOJ's NPA and the SEC's complaint specifically mention that Noble conducted a worldwide review of its operations. That no other conduct was mentioned in either the DOJ's NPA or the SEC's complaint, suggests that Noble's Nigerian import/export issues were an isolated incident, not indicative of systemic issues throughout the company's other operations.

In a press release (here) Noble's CEO stated that "ethical business conduct and strict compliance with the law remain central to Noble's operating philosophy," that the company "is pleased that these investigations have been concluded and a resolution has been reached," and that the company "is moving forward with a continuing commitment to ethical business practices and a dedication to compliance, ideas that are reflected in our core values, our policies, our training and our expectations for ethical behavior." The release notes as follows: "In May 2007, the Company self-reported to the DOJ and the SEC possible improper payments by a customs agent in connection with securing temporary import permits and extensions for the operations of Noble's rigs in Nigeria. An internal investigation was promptly conducted by independent outside counsel, and the Company has cooperated thoroughly with the independent investigator's review and the government's investigation."

In a 10-K filing yesterday, Noble stated as follows:

"We are currently operating three jackup rigs offshore Nigeria. The temporary import permits covering two of these rigs expired in November 2008 and we have pending applications to renew these permits. We have received notice that we will be allowed to obtain a new temporary import permit for one of the two rigs and are in the process of clarifying this approval. However, as of October 31, 2010, the Nigerian customs office had not acted on our application for the second unpermitted rig, but we are discussing undertaking the same process as for the first rig. We did obtain a new temporary import permit for the third rig in 2009 that had previously been operating with an expired temporary import permit, while the application was pending, by exporting and re−importing the rig. We continue to seek to avoid material disruption to our Nigerian operations; however, there can be no assurance that we will be able to obtain new permits or further extensions of permits necessary to continue the operation of our rigs in Nigeria. If we cannot obtain a new permit or an extension necessary to continue operations of any rig, we may need to cease operations under the drilling contract for such rig and relocate such rig from Nigerian waters. In any case, we also could be subject to actions by Nigerian customs for import duties and fines for these two rigs, as well as other drilling rigs that operated in Nigeria in the past. We cannot predict what impact these events may have on any such contract or our business in Nigeria. Furthermore, we cannot predict what changes, if any, relating to temporary import permit policies and procedures may be established or implemented in Nigeria in the future, or how any such changes may impact our business there.